The Power of Incentives

by Erin McCune on May 17, 2007

in Management

You may have seen the headlines and dramatic photos of the tanker truck accident and explosion that melted a freeway exchange in the East Bay (details here). The accident took place April 30th. CalTrans estimated that it would take 60 days and $20 million to repair the two freeway connectors that were damaged.

A freeway construction firm with a reputation for fast work bid low, gambling that they could finish the job early and collect $200K for each day they are ahead of schedule. Initially they anticipated they'd have the work done by June 2nd – today they announced they'll be done next week, in time for the Memorial Day weekend traffic.

A powerful example of how incentives motivate teams.

From the SF Chronicle:

Ba_maze_watch_036_pc

Myers said the task of rebuilding the connector from east Interstate 80 to
I-580, which failed when a gasoline tanker on I-880 below crashed and caught
fire April 29, would likely be done May 24. If so, it would be a remarkably
speedy repair job on one of the Bay Area's key highway exchanges and mean $5
million in extra cash for C.C. Myers Inc. 

The Rancho Cordova-based construction company began repair work May 7, the
same day it was awarded the contract with the low bid of $867,075  –  well
below the Caltrans estimate of $5.2 million and the $20 million the department
has set aside for the reconstruction. 

The bid shows that C.C. Myers, with a reputation for making fast emergency
repairs, is banking on finishing the work early and collecting millions more in
incentive payments for beating the deadline, agency Director Will Kempton said.

To encourage an early reopening, Caltrans offered a bonus of $200,000 for
each day the work is finished ahead of the June 27 deadline, with a maximum of
$5 million. For each day work goes past the deadline, the contractor would be
assessed a $200,000 penalty. For C.C. Myers to collect the maximum under the
contract, work would have to be completed by June 2.

If only CalTrans incented all of their construction vendors similarly… then we could have avoided the Bay Bridge reconstruction debacle.


 

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